WASHINGTON — State budget conditions will improve slightly this fiscal year, even though states will continue to be under considerable financial stress, according to a biennial report to be released Wednesday by the National Governors Association and the National Association of State Budget Officers.
The loss of temporary federal aid that the American Recovery and Reinvestment Act provided to states during the past two years will amplify the challenges of the coming fiscal year as well as fiscal 2012, and could prompt even more state spending cuts, the groups said in the 84-page report.
The recession pummeled state revenues from sales, personal income, and corporate income taxes, which comprise about 80% of their general funds. As a result, states have slashed budgets for the past two fiscal years.
But halfway through fiscal 2011, 35 states are planning to spend more of their general funds than they did in fiscal 2010, which for most states ended June 30.
The groups found that states have enacted budgets for fiscal 2011 calling for $645 billion in general fund spending, an increase of 5.3%. However, that spending level falls short of the fiscal 2008 level by more than $40 billion.
To fix their budget gaps, states have done more than cut general fund spending; they have raised taxes, tapped their budget balances, and tried to stabilize themselves using the $151 billion of emergency aid authorized by ARRA.
But that funding will run out in fiscal 2012, which “presents a very difficult situation” for the states, according to the NGA and NASBO. Because of ARRA, the federal government’s share of state budgets rose to about 35% in fiscal 2010 from about 26% in fiscal 2008.
“The removal of these funds, when combined with an extremely slow recovery in state revenue collections, could result in severe cuts to state programs and services,” the groups said in their report.
According to NASBO’s most recent expenditure data, states were estimated to have spent about $1.6 trillion in fiscal 2010 from all sources, including bonds.
Strategies that states used to narrow or eliminate budget gaps in fiscal 2010 included issuing lottery revenue bonds in Arizona, restructuring debt in New Hampshire, including the state’s university system, and transferring money from the debt service fund in Tennessee.
Strategies used in fiscal 2011 include debt restructuring in Massachusetts, Michigan and New Hampshire, and various cuts to agencies and public programs.
